Digital disruption: Time for action by banks

The banking industry is at a crossroads. Technology has driven unprecedented change, with mobile and online in particular revolutionizing the banking landscape. Innovations in payments have led the way, but ultimately the entire banking value chain will be impacted. Barriers to market entry, meanwhile, have been greatly diminished by technology, reducing the ability of traditional banks to fend off competitive threats while simultaneously dealing with the almost overwhelming burden of regulation. Simply put, many banks are not well equipped for this rapidly changing marketplace.

It would be one thing if this meant that banks were not prepared for a digital future that lies ahead. The reality, however, is that the banking industry is in the midst of a digital present, and in fact has already experienced a bit of digital past.

Banks have already acknowledged the need for digital transformation, and they've even demonstrated a keen understanding of the digital landscape with capabilities such as remote deposit capture. By and large though, they've avoided wholesale digital transformation. Decommissioning the legacy has been a challenge, resulting in inconsistent online and offline experiences. This is the next battleground: creating a seamless experience no matter the channel.

The reasons behind the industry's hesitation are many, but much of the issue can be boiled down to one simple truth: Most traditional banks would not look like they do if they were being designed today. A multitude of complex interwoven processes have grown organically within the back office, often exacerbated by previous M&A activity and a subsequent failure to integrate. Meanwhile the existing technology estate is an enormous cost burden and acts as an inhibitor of business agility and change. This confluence of factors has led to a situation where, on average, more than 76% of all bank IT spend currently goes to "keeping the lights on," leaving behind insufficient budget and resources to truly digitize operations.

That status quo will have to change soon though. Established banking brands are currently facing unprecedented competitive threats from a variety of new entrants and tech savvy rivals. The banking industry has fended off such competitive threats in the past. However, many of the advantages that protected banks then have since been lost. Customer acquisition, servicing and retention can all be facilitated through online and, increasingly, mobile channels. Recent failures and scandals also mean that the reputations of the banks have no real currency. Customers have lost confidence in banks and no longer trust them in the default way they did previously. Other, more trusted brands that offer financial services are capitalizing on this. Look at leading retailers Google and Apple as examples.

Payment innovations by non-banks have greatly enhanced the customer experience and given these players access to customers of traditional banks. ATM and branch networks are no longer differentiators, with the growth of cashless, mobile and online transactions having greatly diminished the value of these assets.

As banking becomes increasingly mobile and virtual, new digital technologies will be at the heart of the entire business model. These technologies offer new entrants the ability to create a lean, efficient, virtual banking organization that is not burdened by the same legacy issues faced by their more established competitors. This enables greater flexibility and scalability, making product launches and enhancements simpler.

In fact, in some markets, "challenger banks" with full mobile and online functionality are targeting the many disaffected customers of the established banking brands. It remains to be seen just how much leaner, customer-focused and efficient these new entrants will be in the long run. Established banks must respond to the threat as a priority, as many of the agile new entrants will use digital as the tipping point for change and may have a competitive edge.